UPDATE 2-As costs climb, Australia resource investment set to slow

Tue Nov 27, 2012 11:00pm EST

* Investment in Australia's resources sector rises to just over $280 bln

* Investment increase partly reflects rising development costs

* Number of committed projects falls

* Minister warns of challenging times ahead

By James Regan

SYDNEY, Nov 28 (Reuters) - Australia's massive pipeline of liquified natural gas, coal and other resource projects faces increasing pressure from rising costs and falling prices, threatening a sector that has so far shielded Australia from the global economic downturn.

Investment committed to Australian resource projects at the end of October rose to a record $280.5 billion, partly reflecting higher project costs and masking a fall in the number of committed projects, data from Australia's Bureau of Resources and Energy Economics (BREE) released on Wednesday showed.

"Even with such a pipeline of investment there is no doubt that we are entering a challenging phase," Australia's minister for mines, Martin Ferguson, said after the report's release.

"In the face of lower commodity prices, the delivery of this pipeline of projects is contingent on keeping production costs down, providing access to skilled labour and increasing our productivity and efficiency."

Australia has experienced a boom in LNG over the last few years, but development costs have also ballooned due to soaring labour costs and the strong local dollar. Three of seven LNG projects in early stages of construction have already announced cost hikes averaging more than 20 percent, just as U.S. gas suppliers are making headway into Asian markets.

A fourth, Chevron's $37 billion Gorgon LNG project in northwestern Australia, is currently under cost and schedule review, with some reports that costs could swell to A$60 billion.

Overall, committed investment in major resources and energy projects rose about 3 percent to A$268.4 billion ($280.5 billion) at Oct. 31 versus April, while the number of projects fell to 87 from 98.

The decline takes into account projects that are up and running and no longer need development funding.

Still, the number of projects replacing those completed is slowing, with those announced or at feasibility phases falling to 277, the lowest in three years, the BREE data showed.

The slowdown comes amid declines in most commodities prices, driven by a drop-off in Chinese demand which has forced miners -- from the world's largest, BHP Billiton, to the smallest -- to review investment plans.

The commodities rout has thrust Australia into a debate over whether the resources boom is over and can no longer be relied on to create jobs, power growth and raise tax revenue in a $1.4 trillion economy that has gone 21 years without a recession.

LNG DEVELOPMENT COSTS JUMP

Much of the investment pipeline, A$195 billion, is for LNG, gas and petroleum projects -- a sum comparable to the total cost of the Apollo Moon Program in 2012 prices, according to BREE.

Australia has said it aims to overtake Qatar as the world's top exporter of LNG by 2017, though there is growing uncertainty over the outlook.

Royal Dutch Shell may delay a final decision on whether to push ahead with its Arrow LNG plant in Australia as it considers feeding its gas into other LNG projects in the area due to rising costs.

Earlier this year, sources said the cost of the Arrow LNG project in Queensland may have increased to $34-$36 billion from the $24-$26 billion initially touted.

U.S. GAS THREAT

Meanwhile, a boom in unconventional gas exploration in North America has led to a collapse in U.S. natural gas prices, meaning that potential American exporters will be able to offer their gas at lower prices than Australia.

At current prices, suppliers in the United States and Canada could undercut Australian suppliers by as much as 20 percent on sales to Japan alone.

The new competition from North America as well as other new LNG hot spots such as East Africa mean the window for new Australian LNG developments has closed, according to some industry experts.

Asian LNG December spot prices are trading at over $15 per million British thermal units (mmBtu), against U.S. natural gas prices of just over $3.75 per mmBtu.

Tokyo has been negotiating with Washington since last year to allow more shale gas projects to export LNG to Japan, which hopes to receive LNG shipped via the Panama Canal as early as 2015.